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Taking SIPP lump sum as income
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There is not an automatic 55% tax on death. A spouse inherits 100% into their own pension pot if they want to, no tax charge at all. So do some very limited types of financial dependent. For those who want the money outside a pension, life assurance should be used. With your claimed qualifications you surely know this, so why make the wrong claim about it?
To invest 25% of 350k into S&S ISAs takes four years using the ISA allowance of two people. VCTs are also an option for suitable investors and in those cases it can all be done in one year using one person's allowance. While the money is not in the ISA I'd expect an IFA to advise putting the interest-generating investments into the ISA first and the dividend or capital growth generating ones outside, since that is likely to minimise the tax cost. There's still potential merit in using a few stages of staged drawdown, though, if the compromise to flexibility is acceptable. Maybe that's why it's been suggested in this case, we just don't know.
A lump sum is not just a lump sum. It's income flexibility. If you take maximum lump sum and maximum income from day one you have the greatest possible amount of flexibility because all of the lump sum and all of the income is moved outside the GAD limit restrictions. Anything else has lower flexibility because it'll reduce the amount of income moved out of the pension pot. This is why it's always inaccurate to say that phased drawdown has the greatest flexibility - it's a provably false claim in the general case.
So I disagreed with the lump sum because spending the lump sum instead of the income reduces both capital and income flexibility. Preserving the lump sum provides very useful protection for things like GAD limit changes or market drops just before a GAD limit calculation is done - in such cases the money can be withdrawn from the ISA at a higher rate to cover for the reduced permitted drawing from the 75% still in the pension pot. But only if the lump sum has been preserved instead of spent.
But there are combinations of tax and tax wrapper used circumstances where phased drawdown offers the best combination of tax treatment and flexibility. Not absolute best flexibility but best compromise for a particular customer's situation. And I think it's quite likely that where you have used this product it's useful, though I do have some reservations if you don't consider a lump sum to provide income protection even in pure income cases.
I agree that there is a potential for the rules to change to be more liberal rather than more restrictive, as the drop in GAD limit that is now being restored was. Given increasing life expectancies I think it's more likely that the rules will be made more restrictive with respect to income that can be withdrawn, though I can hope for the opposite.
Given your background, consider how you would respond to the following complaint:
Customer wants income with good protection for income level. An IFA advised phased drawdown over five years. No prospect of income entering higher rate tax band. Customer wants to preserve capital for spousal income and maybe inheritance, so prefers not to use an annuity. Six years later, there is no capital available. The market drops by 20% and a GAD calculation is done, reducing the available income by 20%. The customer complains that the IFA should have advised taking the income from all of the 75% from day one and this would have left them money invested in an ISA that they could use to smooth the income level until the markets recover.
I know how I react to that scenario: the advice to spend the capital compromised the customer's financial situation and left them in avoidable financial trouble after a completely routine and predictable market event.
Of course I expect that you've always ensured excellent protection against this scenario in your professional cases, so I don't want to suggest otherwise.
It's good to see you posting here, so do try not to be discouraged when limitations or flaws in what you write, or just different approaches, are mentioned. It's one of the great strengths of community discussions, even if it is a little uncomfortable at times.0 -
I am a highly qualified pension specialist (CII exams J04,5 and AF3 plus many others) and I spent 3years in the pension complaints department of the Financial Ombudsman Service.
I suggest, that as a professional, you should have a tag line with this information.0 -
For us mere mortals, its comforting to know that highly qualified specialists can make mistakes from time to time!
The more opinions expressed the better imo - financial professionals or average Joe Bloggs, everyone can learn from each other.0 -
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There is not an automatic 55% tax on death. A spouse inherits 100% into their own pension pot if they want to, no tax charge at all. So do some very limited types of financial dependent. For those who want the money outside a pension, life assurance should be used. With your claimed qualifications you surely know this, so why make the wrong claim about it?
I'd recommend reading the second paragraph of my first post again (I say again but your comment suggests that actually you haven't read it).To invest 25% of 350k into S&S ISAs takes four years using the ISA allowance of two people. VCTs are also an option for suitable investors and in those cases it can all be done in one year using one person's allowance.
You're assuming there are two people and that certain types of investable assets are suitable, and that other capital allowances are used/unused when we know nothing about the individual. And you're putting up VCTs as suitable for someone about to enter retirement (Do you have any working knowledge of regulatory compliance, or capacity for loss?)So I disagreed with the lump sum because spending the lump sum instead of the income reduces both capital and income flexibility.
I'm starting to think that you don't understand phased capped drawdown. You only spend the 25% of the portion of fund that is crystallised, with 100% of GAD income coming from the remaining 75%. And to return to a running theme in my posts, most people using this don't have the need for a lump sum from the pension. It is a tax mitigation strategy (tax free cash isn't taxed!) for drawing income.though I do have some reservations if you don't consider a lump sum to provide income protection even in pure income cases.
Where did I say this? Or from what that I have said have you inferred it from? Short and medium term (that's 1 to about 7 years in retirement terms) cash management is a vital part of any unsecured income strategy.An IFA advised phased drawdown over five years.
Phased capped drawdown is an annual advice process, you don't make a five year recommendation at outset.The market drops by 20% and a GAD calculation is done, reducing the available income by 20%.
This wouldn't happen as each tranche of phased drawdown income has its own three year review period, thus significantly reducing the risk that market conditions in the short term would have a significant impact on overall income. Plus this strategy is not usually suited to those who would want or need the maximum available income that the fund can provide from outset, because at the end of the crystallisation process there is no more tax free cash element to draw on and that generates a risk that GAD rates or fund values might not be enough to derive the required income.
A 20% market fall would not equal a 20% reduction in income because cash wouldn't fall and any competent adviser would have a minimum of 2 years income in cash and as much as 5 depending on a variety of things.a completely routine and predictable market event.
Do be sure and tell us all when your prediction for the next one is, won't you. I'll make sure that I switch all my funds into cash! Markets are neither routine or predictable.Of course I expect that you've always ensured excellent protection against this scenario in your professional cases, so I don't want to suggest otherwise.
No but you'll indirectly imply it by arguing against all aspects of the information that I have provided in this post.It's good to see you posting here, so do try not to be discouraged when limitations or flaws in what you write, or just different approaches, are mentioned. It's one of the great strengths of community discussions, even if it is a little uncomfortable at times.
Did you read this back after you'd written it? I don't think that you made it patronising enough! There is absolutely nothing flawed with what I have written here, much of your response has been flawed through not having read what I did actually write.
The only thing that I find uncomfortable is that there are people here who speak with such authority and credibility in such a dangerous and misleading manner.
I'd also like to point out that there should not be the option for different approaches, this post asked for factual information on a given approach, with no specific circumstances divulged. It did not ask for a point of view on the action suggested. I obliged with a full and accurate response.
You, and others, have sought to establish more in order to give information that wasn't sought, or have queried the question or suggested alternatives, without providing what was asked when in fact you cannot possibly achieve what you are setting out to do because you will never have enough information in a forum environment.
You should try to practice answering the question that is asked. If someone does that and you disagree on a point, why not ask specifically about that point, for example
This is not helpful. You could have said, "why specifically do you think that capped drawdown is less flexible, when such and such is the case?". Surely better than a flippant and confrontational statement?Quote:
Originally Posted by Fabius
the significant benefit of phased is that it offers the highest amount of continuing flexibility
It does not.
I think I'll go back to the forums where the grown ups are.0 -
Fabius,
Lets look at the original question, starting "It has been suggested that my friend takes the lump sum ( he has no need of the cash at present) as income for the next 7-8 years."
If he doesn't need the cash why is there a reason to use any form of drawdown? That's the major question here, what's the problem that phased drawdown is trying to solve?
The poster may not have asked that question but it's one that has to be considered because it's common for people to come here with a solution that's not the appropriate one for the problem they have. So we often ask what problem they are trying to solve. Phased drawdown is pretty uncommon as a percentage of all drawdown situations, so wondering why it's suitable is a good idea.
You're surely seen cases where the driver for selling a phased drawdown plan looked more like remuneration for an adviser than client benefit. No way of knowing if that's the case here, we don't even know why it's being proposed.
Moving on to your post:
I'd read that second paragraph in your first post, which doesn't say that the money is not subject to the 55% tax charge if a spouse takes the money in a pension pot. Rather, it says "alternative death benefits" which is probably meaningless for ognum, at least compared to simply saying into a pension of their own.
I didn't assume that there are two people, I merely know it's the most likely case and used that as the most convenient one because it's the most common one. Naturally it'd take longer for one person and that would also increase the chance that phased drawdown is appropriate.
I wrote "VCTs are also an option for suitable investors". Yes, I'm familiar with capacity for loss, though not with all of the regulatory compliance that an IFA may have to deal with. I'm also familiar with the way VCT risk levels vary and the potential benefit of tax free ongoing dividend income for life from them. For a suitable amount of the assets of suitable investors, of course.
I agree that phased drawdown is a potentially useful tax management tool.
Yes, I'm familiar with phased drawdown and the option to to do it within schemes that will put each tranche into pots with their own GAD calculation period or schemes that will use the same one for each. Crystalising in tranches so that they get different GAD calculation times is a nice tool IMO, whether using phased drawdown or not.
In using a 20% drop instead of a 45% one I already allowed for diversification out of pure equities.
I agree with you about what a competent adviser would keep money in cash (and outside the pension, so it's available after a GAD limit reduction) and assumed that you would do that and other things to reduce risk in any cases you handled.
I can't tell you when or even guarantee that there will be a market drop. I just know that they have historically happened regularly and that prudent planning needs to consider what happens when they do.
I wasn't intending to patronise you, I was trying to say that even though I was disagreeing with you on some things I welcome your participation and think it's a good thing. I'd like to see you post more. Still.
Phased drawdown can be an excellent tool. Just need to try to find out if it is appropriate when someone asks about using it. It used to be an area with relatively high cost products that seemed to be milked for revenue by some IFAs.0 -
jamesd,
This is getting silly and I'm going to have one last say and then I'm gone. I won't compete (and it feels like I am competing, there is no collaboration to assist ognum here) with people who openly state that they are not only not IFAs but are not even in the industry and are clearly out of their depth!Lets look at the original question, starting "It has been suggested that my friend takes the lump sum ( he has no need of the cash at present) as income for the next 7-8 years."
That wasn't the question. The question was:Please can the experts tell us the advantages and disadvantages of this?
You go on to tell me that the "major question" inferred through a lack of clarification is why use any form of drawdown. Yet your initial post made no big deal of this. In fact, you said that you hoped he knew that annuity wasn't the only option and then recommended capped drawdown as likely to be the most sensible option.
I made the assumption that ognum had quite a bit of information in his head and wanted some information, not advice.
I haven't seen many inappropriately sold phased plans, certainly not for reasons of ongoing fees as most advisers who engage in this sort of practice in my experience see standard drawdown as the easier option for their purpose (and much easier to sell to their client and compliance dept). Generally, the advisers that used phased are at the top of their game and know what they are doing (I deal with lots of them often). Anyway if you go back far enough in this industry everything has been missold at some point!
My point, which I don't feel can be made strongly enough, is that there is no benefit in second guessing what an individual has been told that has resulted in them coming to a forum to ask for general advantages and disadvantages (which involve no subjectivity in reply) of a particular approach, with a couple of specific queries. What you and others do in seeking to go beyond the mandate of answering the question is simply confuse the situation.Phased drawdown can be an excellent tool. Just need to try to find out if it is appropriate when someone asks about using it. It used to be an area with relatively high cost products that seemed to be milked for revenue by some IFAs.
You absolutely don't need to try to find out if it is appropriate. This post did not at any time seek a judgement on suitability nor are you in any position to provide one. Your second sentence is actually more accurately attributed to income drawdown (as was), in my not insignificant experience.I didn't assume that there are two people, I merely know it's the most likely case and used that as the most convenient one because it's the most common one.
See what you've done there is said that you didn't make an assumption and then said that you did and provided justification for it. If you don't know something (and you don't know if ognum's friend is single, married, widow/er) you have to assume, and you assumed. Nothing wrong with reasoned assumptions, the whole industry is built on the things.
I think you should go and do some reading on VCTs. There is currently a lot of regulatory noise around them and frankly you shouldn't be putting them on the table at all in a pensions and retirement forum. The people who would need to use them in retirement (or generally in fact) are not money saving expert demographic.
Ognum, if you're still reading this (and credit to you if you are!), then I apologise for the fact that what I felt was a helpful post has ended up as some kind of character assassination. Hopefully you can help your friend with their adviser make the right choice for income options in retirement.0 -
I have read this through (several times) and the information and discussion has been useful.
The thing you don't tend to get when you talk to an IFA is more than one opinion, adviced is based on their best opinion and I have always believed this can vary for many reasons.
I thank you both for this useful debate that I have watched from the sidelines and learned from.
I hope you both continue to post here.0
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